Payroll growth slows to 78,000 in May

U.S. May unemployment rate falls to 5.1%

WASHINGTON (MarketWatch) - Hiring in the United States slowed in May to the weakest in nearly two years, fueling speculation that the Federal Reserve could be nearing the end of its interest rate hikes.

Nonfarm payrolls increased by 78,000, the lowest since the job expansion began in August 2003, the Labor Department said, based on a survey of business establishments.

Meanwhile, the unemployment rate improved to 5.1% from 5.2%, according to a separate household survey. It's the lowest unemployment rate since September 2001. Read the full report.

Economists were expecting much stronger job growth in May, forecasting an average gain of 186,000, according to the survey conducted by MarketWatch. See Economic Calendar.

The weak hiring briefly encouraged bond bulls, who sent the yield on the benchmark 10-year note to 3.82% after the report, the lowest in 14 months. By afternoon, however, the rally fizzled and a rout was on. Yields closed at 3.98%. See Bond Report.

The report cemented views in the market that the Federal Open Market Committee might raise rates just once or twice more before pausing. The federal funds futures market is predicting a 3.53% fed funds rate in December, up from 3% currently.

"This all but seals the deal on a coming cessation in Fed tightening," said Sherry Cooper, chief economist for BMO Nesbitt Burns. She said the Fed would raise rates one or two more times.

Irwin Kellner, chief economist for MarketWatch and the Weller professor of economics at Hofstra University, said the Fed is done after the June hike. Listen to the interview.

Others cautioned restraint.

"We would advise taking a step back and looking at the forest instead of the trees," said Joshua Shapiro, chief economist for MFR Inc., adding that the "sawtooth" pattern of payroll growth over the past four months makes the trend hard to see.

Strong growth in February and April has been offset by weaker readings in March and May.

"Until we see two weak numbers in a row, I am absolutely unconvinced," said Stephen Stanley, chief economist for RBS Greenwich Capital.

Payroll growth in March was revised down by 24,000 to 122,000, while April payroll gains were unrevised at 274,000. February's gain was unrevised at 300,000. So far in 2005, payroll growth has averaged about 180,000, nearly identical to last year's payroll growth.

Average hourly earnings increased 3 cents, or 0.2%, to $16.03 in May. Wage earnings are up 2.6% in the past year.

The average workweek was steady at a revised 33.8 hours. Total hours worked in the economy increased 0.1%.

Hiring weakened across most sectors in May, but most industries were still adding jobs. Private sector hiring slowed to 73,000 in May from 261,000 in April. Factory employment fell by 7,000, the 10th decline in the past 12 months. Construction jobs increased by 20,000.

Service-sector employment rose by 64,000 after 232,000 in April. Most of the gains were in health services, which rose by 33,000. Retail employment increased by 11,000. Temporary help jobs fell by 4,000.

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